The global economic crisis of 2007–2009 and

its impact on the economy of pakistan.

Quotation by:
ALBERT SCHWEITZER
“Success is not the key to happiness. Happiness is the key to success. If you love what you are doing,
you will be successful.”

Overview:
The global financial crisis, brewing for a while, really started to show its effects in the
middle of 2007 and into 2008. The financial crisis, which has been developing at Wall Street, has
got people worried in developing countries around the world. Around the world stock
markets have fallen, large financial institutions have collapsed or been bought
out, and governments in even the wealthiest nations have had to come up with
rescue packages to bail out their financial systems.

History:

It was began in July 2007 when a loss of confidence by investors in the value of
securitized mortgages in the United States resulted in a liquidity crisis that prompted a
substantial injection of capital into financial markets by the United States Federal
Reserve, Bank of England and the European Central Bank. In September 2008, the
crisis deepened, as stock markets worldwide crashed and entered a period of high
volatility, and a considerable number of banks, mortgage lenders and insurance
companies failed.Although America's housing collapse is often cited as having caused the
crisis, the financial system was vulnerable because of intricate and highly-leveraged
financial contracts and operations.
The situation is not limited to the meltdown of financial markets, the real economy
at the national and international level, its institutions; and its productive structures
are also in difficulty.

SCOPE
The crisis in real estate, banking and credit in the United States had a global reach,
and is affecting a wide range of financial and economic activities and institutions
world wide.

Cause of the financial crisis:

The role of central banks:

It has been proposed that the crisis, in which credit created through the central
banking gives rise to an artificial boom, which is inevitably followed by a bust. the
central banks should not be involved in debt markets. The yield curve from 2000
through 2007 illustrates the role that credit creation by the Federal Reserve may
have played in the on-set of the financial crisis in 2007 and 2008.

Housing bubble: The narrowing of the yield curve ( ) from 2004 and the inversion
of the yield curve during 2007 indicated a bursting of the housing bubble.

Commodity bubble: A commodity bubble was created following the collapse in the
housing bubble. The inflationary effect of the prolonged period of a very positively
sloped yield curve resulted in inflation of asset prices .The reason this happened was
likely due to the cheap goods that were imported
Sub-prime lending:

This sub prime lending is considersd as one of the reason to the econiomic crisis.But
It has been pointed out that there were not enough of these loans made to cause a
crisis of this magnitude.

Over-leveraging, credit default swaps and collateralized debt obligations

Another probable cause of the crisis was widespread miscalculation by banks and
investors of the level of risk inherent in the unregulated collateralized debt
obligation and Credit Default Swap markets.

Under this theory, banks and investors systematized the risk by taking advantage of
low interest rates to borrow tremendous sums of money that they could only pay
back if the housing market continued to increase in value.

2007 bank run on Northern Rock, a UK bank.

One of the first victims was Northern Rock, a medium-sized British bank.[27] The
highly leveraged nature of its business led the bank to request security from the
Bank of England. This in turn led to investor panic and a bank run in mid-
September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to
nationalise the institution were initially ignored; in February 2008, however, the
British government (having failed to find a private sector buyer) relented, and the
bank was taken into public hands. Northern Rock's problems proved to be an early
indication of the troubles that would soon befall other banks and financial
institutions.
Systemic crisis.

The constant decrease in GDP growth rates in Western countries since the early 1970s
created a growing surplus of capital which did not have sufficient profitable
investment outlets in the real economy. The alternative was to place this surplus into
the financial market, which became more profitable than productive capital
investment this phenomenon has lead to financial bubbles and is the deep cause of

the financial crisis of 2007-2009. Impact on the economy of pakistan.

The financial turmoil is more then likely to affect Europe, Japan and North
American countries with full intensity. The crisis affected area, United States and
Europe, hold a fundamental value for Pakistan’s economy.
Pakistan’s external sector comprised of trade, foreign investment, remittances, and
capital flows is interwoven with these countries. All these indicators of external
sector have more than 50 per cent of the stake in this region. The short time ago, the
foreign exchange reserves of Pakistan sharply declined, currency was depreciating, high
inflation, high trade deficit and Pakistan was almost near to bankruptcy.

The global financial crisis affects the Pakistan by two ways, directly and indirectly.

GROWTH:

The growth model being followed in Pakistan over the years is highly dependent on
foreign capital inflows, mainly from these countries. The economic growth of Pakistan
has taken a hit, with growth slowing down from 7.3 percent during 2004-07 to 5.8percent in
2008 and projected to slide to around 3 percent in 2009. Pakistan’s economic growth has
directly affected by this crisis and slowed down.
The financial crisis may or may not hit with same intensity or severity as it is doing
to the developed world, but still there are various channels through which the crisis
may hit Pakistan economy.

Trade channel:

America is our only major trading partner with which we have a trade surplus.
And, America is slowing down like never before. The Global Financial Crisis and
the accompanying global credit crunch had a direct impact on Pakistan.
Pakistan largely depends on exports of cotton and textile related items- rice, sports
goods, chemicals and manufacturing items also contribute to exports. More than
one-half of Pakistan’s external trade is dependent on these countries. The demands
for its export products dropped significantly. Exports during October-December2008
actually declined by 1.4 percent, indicating a worrisome outcome. Pakistan has a very inelastic
import structure and if exports are hit by a crisis than the current account deficit is likely to go
beyond the sustainable limits.

Banking channel:

The global crisis has really added fuel to the fire. Pakistan facing bankruptcy as world
financial crisis. There are substantial changes taking place in the interrelation with
the structure-forming elements in the global financial market.
The drying up of credit internationally has hit Pakistan hard with the banking
system suffering a severe liquidity problem. The government is on the verge of
seizing bank lockers and foreign-currency accounts to rescue its deteriorating
financial position.
The presence of foreign banks in Pakistan expands access to credit as well as
financial services, which can spur efficiency and innovation in domestic banks,
however, ripple effect of shocks from the credit squeeze in the US has impact on
local financial markets through these banks

Financial market.
Stock market.(KSE):
The stock exchanges, in developing countries have crashed and things look bleak for
the financial markets. Pakistan’s stock markets not integrated to a great deal with
international markets which provide some immunity to these sectors.

Exchange rate:

Also, exchange rate depreciation could expose some bank borrowers to exchange
rate risk, or raise their costs of operation, with negative effects on loan recovery
performance.
The other likely impact would be on the value of our currency. The years of our
linkage with the dollar has significance for us. Any drastic depreciation of dollar
may give a hard hit to Pakistan.
Positive impact:

In 2007-08, Pakistan has added $4.2 billion to its stock of external debt without
borrowing a single penny only because of depreciation of dollar versus major
currencies like euro and the Japanese yen.

Conclusion.
The world economy is slowing down liken never before. The slowdown in global growth will
reduce trade, remittances, foreign direct investment, and, possibly, aid, and these factors
will have a major impact on Pakistan, including second-round effects on the financial
sector.
“The slowdown in the global economy will adversely impact pakistan exports and thus
foreign earnings, Coupled with lower foreign capital flows and domestic investment, this
will significantly reduce growth for pakistan.”
Even though Pakistan may escape the immediate negative implications of the global
recession, there will be long-term direct and indirect consequences. Of the directs,
the foreign investments and bilateral assistance are on the top. This financial crisis
will have a significant impact on the size of remittances which Pakistan receives
from the Europe and the US. There is a strong likely hood that this single largest
source of foreign exchange may come under stress. The indirect consequence would
be that Pakistan’s exports will suffer as imports of the economies in recession will
fall and possibility of slashing of funds from ongoing foreign funded projects can not
also be ruled out.
Another outcome is most likely to happen- the efforts and resources required for
war against terror would diminish.
Importantly, the adverse effects of the global economic slowdown are still emerging,
especially given the growth outlook for industrial economies for 2009

Actions that could be taken to reduce the adverse affects of

global economic crisis.

The cascading effects of these crises will present daunting policy challenges to
Pakistan. The Pakistan countries can do a number of things to reduce the adverse
effects of the financial crisis and prepare the way for a resumption of rapid growth
in 2010.
1. Pakistan has to pursue active monetary and fiscal policies to deal with the global financial
crisis which is affecting our economy.
2. The policy attention needs to focus on creating as much additional fiscal space as possible
to prop up the domestic economy while preserving macro economic stability.

3. The ongoing efforts to increase the efficiency and effectiveness of the banking sector
must continue.

4. A careful look at expenditure priorities is in order. Public spending that creates jobs,
especially for the poor, will be essential.

5. Efforts to raise domestic productivity and competitiveness become critical factors for
protecting export market shares. And try to reduce restrictions on trade and investment.

A crisis (plural: crises) (from the Greek κρίσις) may occur on a personal or societal
level. It may be a traumatic or stressful change in a person's life, or an unstable and
dangerous social situation, in political, social, economic, military affairs, or a large-
scale environmental event, especially one involving an impending abrupt change.
More loosely, it is a term meaning 'a testing time' or 'emergency event'.